What is Pendle (PENDLE), and how does it tokenize returns?
DeFi platforms, such as decentralized exchanges (DEXes), Uniswap and Balancer, and credit or lending protocols Aave and Compound, allow you to generate revenue from tokens added to liquidity pools. There are many ways to profit from DeFi:
- liquidity mining,
- farming,
- liquidity-stacking,
- lending (lending), and others.
However, most decentralized protocols do not provide tools for efficient, much less automated, management of DeFi positions. All this significantly complicates the process of managing a crypto portfolio.
The developers of Pendle have presented a protocol that solves this and other problems related to digital asset management — this project will be discussed in this article.
What is Pendle?
Pendle is a decentralized or DeFi tokenized asset management protocol based on the Ethereum blockchain. The Pendle protocol allows you to trade DeFi tokenized assets and participate in liquidity mining. Pendle is also called a "tokenized yield protocol," the platform itself is a special kind of decentralized exchange (DEXes).
DeFi protocol Pendle was launched in July 2021 by a team from South Korea. The premise behind the creation of Pendle was the shortcomings of the then-current decentralized DeFi solutions, namely:
- Lack of trading tools for efficient management of crypto asset portfolios;
- Lack of options for trading tokenized earning assets.
How does Pendle work?
Similar to DEX exchanges Uniswap and Sushi, the Pendle protocol works on the principle of an Automated Market Maker (AMM), which is an algorithm that manages liquidity in decentralized exchange protocols.
The main features of the Pendle protocol are:
- Tokenization of future returns — this process is similar to Ethereum liquidity staking in protocols like Lido Finance and Rocket Pool, where the user deposits ETH into the pool and, in return, receives stETH liquidity tokens;
- The ability to hedge DeFi positions: users can both maximize their returns in a rising market and hedge against a fall during a bearish trend;
- Depository vote system (vePendle).
The main advantage of Pendle's approach is the reduced risk of impermanent losses arising from high volatility and the subsequent reallocation of tokens in liquidity pools with two or more assets. Instead, the user can deposit any available crypto asset of their choice into the Pendle protocol and receive a liquidity token in return:
- YT eETH,
- LP eETH,
- or PT eETH.
On Pendle's DeFi platform, users can add liquidity in cryptocurrencies such as:
In addition, users can maximize the yield of ETH liquidity staking. For example, they can deposit ETH into Lido Finance or Rocket Pool and deposit the received stETH liquidity tokens into the Pendle protocol in exchange for YT eETH, LP eETH, and PT eETH, thus receiving income from two sources at once. Liquidity staking has become a separate DeFi focus, dubbed LSDFi.
The Pendle protocol also targets the global TradFi (RWA — tangible world assets) market, estimated at over $400 trillion. TradFi is still in its infancy in the DeFi segment and has only a small market share: according to DeFi Llama, the total number of blocked assets (TVL) in the RWA sector is $4.38 billion — less than 10% of the total DeFi and almost 7.5 times less than the TVL of Ethereum.
Pendle risks
As with any other DeFi protocol, there are risks associated with using Pendle. A common danger for all decentralized platforms is the risk of protocol hacking and the withdrawal of funds from pools. In addition, hacking the Pendle web interface may be possible to spoof the original signature when interacting with the protocol's website.
But the main risk of Pendle is perhaps the volatility of YT eETH, LP eETH, and PT eETH tokens. The fact is that users receive liquidity tokens (LPs) at a specific rate, and only at that rate can they then exchange their tokens to get them back. Herein lies the main risk of liquidity tokens: if their rate collapses, users can only bring back a portion of their tokens invested in the liquidity pool.
For example, you put 1000 USDT into the Pendle liquidity pool and received 3.77 YT eETH at a rate of ~$265 per token. If the price suddenly drops 10 times to $26.5, the user will only be able to get back about 10% of the amount invested in the liquidity pool, i.e., $100, and he will lose $900.
Pendle token
PENDLE is Pendle's native ERC-20 DeFi protocol token, providing liquidity on its platform. In addition to Ethereum, the PENDLE token is available on the BNB Smart Chain and Arbitrum networks.
The maximum possible number of tokens (total issuance) is 258.4 billion PENDLE tokens; more than 92% — about 238.2 billion — are already circulating on the market. Limiting the number of PENDLE tokens is a good sign that ensures a shortage of tokens, and when demand increases, the rate increases. In addition, PENDLE has a low inflation rate of only 2% per annum. In comparison, the native cryptocurrency of the Cosmos ATOM network has this figure reaching as much as 20%.
What are the prospects for Pendle?
Pendle has become one of the key players in the LSDFi market along with Lido Finance, although it is still far behind in capitalization. However, the new advanced tools that the Pendle protocol provides to investors and traders may attract many users shortly.
Nevertheless, it is essential to consider the risks of PENDLE tokens, which directly depend on the state of its decentralized platform. If there is a severe incident with the liquidity tokens YT eETH, LP eETH, or PT eETH or with the DeFi protocol itself, it will negatively affect the exchange rate of its native token.
If the circumstances are favorable, as well as the growing demand for LSDFi and TradFi, the rate of PENDLE token may also increase.